‘The worst is yet to come,’ the IMF said about the global economy this week. But, for now at least, South Africa’s inflation looks to be subsiding. (Photo by Askin Kiyagan/Anadolu Agency via Getty Images)
NEWS ANALYSIS
The tide seems to have turned on inflation — but, if recent history has taught us anything, it is to keep our guard up.
Lower petrol prices saw inflation ease in August to 7.6% year-on-year, from the July peak of 7.8%, which marked the steepest yearly increase since 2009. Next week’s consumer inflation print will probably continue the trend, bringing that number closer to 7%.
However, as Reserve Bank governor Lesetja Kganyago pointed out in a speech earlier this week, inflation easing hangs in the balance amid perpetually shifting global conditions.
“Although there has been some cooling in energy and food prices over the past couple of weeks, and slower economic growth which could potentially further temper price pressures,” Kganyago said, “the trajectory for inflation and its outlook remains highly uncertain.”
Over the past three years, South Africa’s economy has been hit by multiple, and often overlapping, shocks – some positive and some negative, Kganyago pointed out.
One major shock to the global economy, the surging oil price, seemed to be subsiding recently. In July, the oil price began to dip below $100 dollars a barrel and, in late September, it fell below $80 per barrel for the first time since January.
The lower oil price signalled much-needed relief for South African motorists, who had been at the receiving end of prohibitive petrol price increases for a number of months. Higher fuel prices have been the main driver of local inflation.
Recently, however, oil has started inching back up again.
The instigator of this U-turn is Opec+, a cartel consisting of the Organisation of the Petroleum Exporting Countries (Opec) and non-Opec partners, who last week decided to sharply curtail oil supplies to resuscitate the price surge.
Higher oil prices are expected to interrupt the previously forecast downward trend in inflation this year and next. Earlier this month, Investec senior economist Annabel Bishop noted that inflation is still on track to average 6.8% year-on-year in 2022 and there are risks to the upside as a result of volatile energy prices.
Of the Opec+ decision, the Bureau for Economic Research noted there would be more price pain on the horizon, especially as the European Union’s embargo on Russian oil imports would only come into full effect later this year.
Given South Africa’s diminished refinery capacity, the bureau said, the cost of refined oil imports is set to remain elevated. This is especially the case amid a weaker rand. Lower oil prices have already been offset by the rand’s weakness, meaning that decreases in the petrol price haven’t been as significant as they could have been.
The local currency has soared past R18 to the dollar, keeping inflationary pressures high and the Reserve Bank hawkish.
The International Energy Agency has criticised the move by Opec+ to curb production, noting on Thursday that the decision has “derailed the growth trajectory of oil supply through the remainder of this year and next, with the resulting higher price levels exacerbating market volatility and heightening energy security concerns”.
With unrelenting inflationary pressures and interest rate hikes taking their toll, higher oil prices, the agency said, could prove the tipping point for a global economy already on the brink of recession.
Recessionary fears factored into the decision by Opec+, which is battling a price slump. The cartel has argued that the production cut is necessary to prevent a collapse in the oil price (akin to the 2008 global financial crisis) amid slower global growth.
This week, the International Monetary Fund (IMF) warned of significantly slower growth going into 2023. “As storm clouds gather, policymakers need to keep a steady hand,” it said in its World Economic Outlook.
The IMF now forecasts that global growth will slow to 2.7% in 2023 — 0.2 percentage points lower than the July forecast — with a 25% probability that it could fall below 2%.
More than a third of the global economy, according to the IMF, will contract this year or next. Meanwhile, the three largest economies, the United States, the European Union and China, will continue to stall.
“In short, the worst is yet to come and, for many people, 2023 will feel like a recession,” the IMF said.
The IMF also expects that stubbornly high inflation will stick around longer than previously forecast, despite peaking in late 2022. Global inflation is forecast to decrease to 4.1% by 2024.
Elevated inflation forecasts will keep central banks on their toes, motivating them to tighten monetary policy. Higher interest rates will throw cold water on consumer demand, thus contributing to glacial economic growth.
The Opec+ plan will probably have a more acute effect on growth than on inflation, Momentum economist Sanisha Packirisamy noted. According to the IMF, if you get a 20% to 30% increase in the oil price, that could sustain a 0.5% cut in the global GDP.
Packirisamy agreed that the inflation path is uncertain, given the many moving parts.
For now, at least, recession fears and tightening financial conditions seem to have kept oil prices in check — signalling some relief for shell-shocked South African consumers.
[/membership]